India’s Economy Projected to Grow at 6.5% in FY26: EY Report

New Delhi: India’s economy is projected to grow at 6.5% in the fiscal year 2025-26 (FY26), as per the EY (Ernst & Young) report and various economic forecasts. This projection underscores India’s robust economic resilience, supported by strong domestic demand, increased investment, and policy-driven reforms. The country has maintained a consistent growth trajectory, emerging as one of the fastest-growing major economies in the world. Despite global economic uncertainties, India’s growth outlook remains positive, driven by factors such as industrial expansion, digital transformation, infrastructural development, and a thriving services sector.

1. Importance of Economic Growth in the Global and Domestic Context

Economic growth is a crucial indicator of a nation’s progress, influencing employment, income levels, investment opportunities, and overall societal well-being. For India, sustaining a 6.5% growth rate is essential in addressing socio-economic challenges, improving living standards, and fostering long-term development. On the global stage, India’s rapid economic expansion enhances its influence in international trade, global markets, and geopolitical discussions. As the world’s fifth-largest economy, India plays a pivotal role in global supply chains, attracting foreign direct investment (FDI) and strengthening economic ties with leading nations. Domestically, higher GDP growth translates into better job creation, increased consumer spending, and improved financial stability for businesses and individuals.

India’s Current Economic Standing

India’s economy has demonstrated strong resilience in the face of global economic challenges, including inflationary pressures, geopolitical tensions, and supply chain disruptions. The country has successfully navigated the post-pandemic recovery phase, supported by government-led initiatives such as Atmanirbhar Bharat (Self-Reliant India), Make in India, and the Production-Linked Incentive (PLI) scheme. Additionally, sectors such as manufacturing, technology, and renewable energy are witnessing significant growth, further contributing to the nation’s economic momentum. According to recent data, India’s GDP grew by 7.3% in FY24, reinforcing confidence in its long-term growth potential. With strategic policy measures, digital innovation, and infrastructural development, India is well-positioned to achieve its projected 6.5% growth rate in FY26, solidifying its status as a major global economic powerhouse.

2. Key Drivers of Growth

India’s projected 6.5% GDP growth in FY26 is backed by multiple structural and policy-driven factors that are accelerating economic expansion. The country’s robust domestic demand, manufacturing resurgence, infrastructure push, and digital transformation are shaping a high-growth trajectory. With strong government initiatives and private sector participation, India is positioned to sustain long-term economic progress.

2.1 Strong Domestic Demand

Growth in Private Consumption

One of the biggest drivers of India’s economic growth is private consumption, which accounts for nearly 60% of the GDP. The Indian consumer market has been expanding rapidly, fueled by rising disposable incomes, increasing consumer confidence, and a shift towards premium products and services. Post-pandemic recovery has led to a resurgence in spending across sectors such as automobiles, real estate, travel, and luxury goods. Additionally, rural demand is strengthening, supported by higher agricultural output, government subsidies, and improved financial inclusion through digital banking.

Urbanization and Rising Middle Class

India is experiencing rapid urbanization, with more than 35% of the population now living in urban areas, a figure expected to reach 40% by 2030. This demographic shift is driving demand for housing, transportation, healthcare, and lifestyle services, contributing significantly to GDP growth. The expanding middle class, estimated to reach 500 million by 2030, is a crucial factor behind increasing consumption. Higher educational attainment, growing aspirations, and digital penetration are transforming spending patterns, with greater demand for quality healthcare, financial services, and branded goods.

Expanding Digital and E-Commerce Markets

India’s digital economy is playing a transformative role in boosting consumption. With over 850 million internet users, the country has witnessed an exponential rise in e-commerce, digital payments, and online services. Platforms like Amazon, Flipkart, Reliance JioMart, and Meesho are catering to a diverse consumer base, including small-town and rural buyers. Government initiatives like Digital India and UPI (Unified Payments Interface) have further accelerated the shift towards a cashless economy. E-commerce, which currently contributes ~5% to GDP, is expected to expand significantly, driving employment and new business opportunities.

2.2 Boost in Manufacturing & Infrastructure

Impact of the ‘Make in India’ Initiative

Launched in 2014, the ‘Make in India’ campaign has played a crucial role in strengthening India’s manufacturing sector, aiming to position the country as a global manufacturing hub. With a focus on domestic production, import substitution, and increasing foreign investments, India has seen significant improvements in industrial output. The government is encouraging multinational companies to set up manufacturing units in India, particularly in sectors such as electronics, automobiles, defense, and pharmaceuticals. As a result, India has become a key smartphone manufacturing hub, with companies like Apple and Samsung expanding local production.

Production-Linked Incentive (PLI) Schemes

The Production-Linked Incentive (PLI) scheme, introduced to enhance India’s manufacturing competitiveness, provides financial incentives to companies in electronics, pharmaceuticals, automotive, and renewable energy sectors. This scheme has attracted billions in investments, with over 500 firms receiving approvals for expansion. The PLI program is expected to contribute $500 billion to India’s GDP by 2025 and create millions of jobs, significantly strengthening India’s industrial base.

Large-Scale Infrastructure Projects

Infrastructure development is a key driver of India’s economic growth, with record investments in transportation, energy, and urban development. Government initiatives such as Bharatmala (highways), Sagarmala (port modernization), and Gati Shakti (multi-modal logistics) are improving connectivity and reducing logistical bottlenecks.

• Roads & Highways: India is constructing 12,000+ km of highways annually, making it the second-largest road network in the world.

• Railways: The Indian Railways is undergoing massive modernization with high-speed trains, electrification, and enhanced freight corridors.

• Ports & Airports: Investments in port expansion and the UDAN scheme for regional airports are improving trade and air connectivity.

• Renewable Energy: India is pushing for 500 GW of renewable energy capacity by 2030, with solar and wind energy projects seeing record investments.

2.3 Digital Transformation & Technological Growth

India’s digital economy has emerged as a powerful growth engine, significantly contributing to its projected 6.5% GDP growth in FY26. The country is witnessing a tech-driven revolution, with advancements in fintech, IT services, artificial intelligence (AI), and telecommunications playing a crucial role in economic expansion.

Role of Fintech and Digital Payments

India is at the forefront of the global fintech revolution, driven by rapid adoption of digital payments, neobanking, and AI-powered financial services. The Unified Payments Interface (UPI) has transformed the payments landscape, processing over 14 billion transactions per month and facilitating seamless peer-to-peer (P2P) and business transactions. The growth of e-commerce platforms like Flipkart, Amazon, and Meesho, along with fintech startups such as Paytm, PhonePe, and Razorpay, has further strengthened the digital economy. AI and blockchain-based financial solutions are enhancing security, reducing fraud, and promoting financial inclusion.

Growth of India’s IT Sector and Software Exports

India’s IT and software services industry, a key contributor to GDP, continues to expand at a rapid pace. The sector generated $245 billion in revenue in FY24 and is expected to cross $350 billion by 2026. Companies like TCS, Infosys, and Wipro are leading global outsourcing in software development, cloud computing, cybersecurity, and AI solutions. Additionally, the rise of Indian SaaS (Software as a Service) companies like Zoho and Freshworks is driving innovation and attracting foreign investments.

5G Rollout and Its Impact on Business and Connectivity

The launch of 5G in India is set to revolutionize multiple industries by enhancing internet speed, improving business efficiency, and enabling automation. With companies like Reliance Jio and Bharti Airtel spearheading the rollout, 5G will support:

• Smart cities and IoT applications

• Faster cloud computing and AI integration

• Enhanced connectivity for rural businesses and startups

• Growth of virtual reality (VR) and augmented reality (AR) in retail, healthcare, and education

The economic impact of 5G is expected to add $1 trillion to India’s GDP by 2035, significantly boosting digital commerce and industrial productivity.

2.4 Foreign Direct Investment (FDI) & Global Trade

India’s increasing attractiveness as a global investment destination is fueling growth in manufacturing, services, and technology sectors. FDI inflows reached $85 billion in FY24, with major investments coming from the US, UAE, Japan, and Germany.

Increase in FDI Inflows Across Key Industries

The government’s focus on self-reliance and industrial expansion has led to record-high foreign investments in:

• Electric Vehicles (EVs): Companies like Tesla and Ola Electric are setting up manufacturing plants.

• Semiconductor Manufacturing: India’s semiconductor policy has attracted investments from Foxconn, Micron, and Vedanta.

• Pharmaceuticals: India remains the ‘Pharmacy of the World’, with increased FDI in vaccine and generic drug production.

Bilateral and Multilateral Trade Agreements

India is actively negotiating Free Trade Agreements (FTAs) with key global partners, such as:

• India-EU FTA (boosting exports to Europe)

• India-UK trade deal (enhancing bilateral trade)

• Comprehensive Economic Partnership Agreement (CEPA) with UAE and Australia

These agreements are expected to increase exports, reduce tariffs, and enhance market access for Indian goods and services.

Expanding Export Opportunities in Services and Manufacturing

India’s service sector exports (IT, consulting, digital services) are growing rapidly, crossing $330 billion in FY24. In manufacturing, India is emerging as a global production hub for electronics, automobiles, and textiles, reducing dependence on China. The ‘China Plus One’ strategy is bringing major global companies to India, further strengthening export-led growth.

2.5 Policy Reforms and Macroeconomic Stability

India’s economic stability is reinforced by progressive policy reforms, fiscal discipline, and financial sector modernization. The government’s emphasis on simplified taxation, ease of doing business, and monetary stability is driving long-term growth.

Impact of GST and Tax Rationalization

The introduction of the Goods and Services Tax (GST) in 2017 transformed India’s tax structure, replacing multiple indirect taxes with a unified system. Benefits include:

• Higher tax compliance and increased revenue collection

• Reduction in logistics costs for businesses

• Improved interstate trade and market efficiency

Tax rationalization has led to record GST collections, exceeding ₹1.6 lakh crore per month, strengthening India’s fiscal health.

Ease of Doing Business Initiatives

India has made significant improvements in its Ease of Doing Business ranking, attracting more global investors. Key reforms include:

• Simplified company registration and business licensing

• Online approvals for land acquisition and environmental clearances

• Digitization of tax filing, reducing bureaucratic delays

These measures have made India a preferred destination for startups and multinational corporations.

Banking Sector Reforms and RBI’s Monetary Policy

The Reserve Bank of India (RBI) plays a crucial role in ensuring financial stability through effective monetary policies. Key reforms include:

• Strengthening banking regulations to reduce NPAs (Non-Performing Assets)

• Encouraging financial inclusion through digital banking and fintech innovation

• Maintaining stable interest rates to control inflation and encourage investments

India’s foreign exchange reserves remain strong at $600+ billion, providing a buffer against global economic shocks and ensuring financial stability.

3. Challenges and Risks

While India’s economy is projected to grow at 6.5% in FY26, several challenges and risks could impact this trajectory. These include global economic slowdowns, inflationary pressures, and employment concerns. Managing these risks effectively will be crucial for sustaining high growth and ensuring long-term economic resilience.

3.1 Global Economic Uncertainty

Slowdowns in Major Economies (US, Europe, China)

India’s economy is closely linked to global markets, and economic slowdowns in major economies like the US, Europe, and China can pose significant risks.

• The US Federal Reserve’s monetary tightening has led to slower economic growth and reduced investor confidence, affecting capital inflows into emerging markets like India.

• Europe’s economic stagnation, driven by high energy costs and geopolitical instability, has weakened demand for Indian exports.

• China’s economic struggles, particularly in its real estate sector and declining manufacturing output, impact global supply chains and trade balances.

A global slowdown could reduce demand for Indian exports, lower foreign investments, and disrupt financial markets, posing challenges to growth.

Impact of Geopolitical Tensions on Trade and Investments

The world is witnessing rising geopolitical tensions, including:

• Russia-Ukraine conflict, which has led to supply chain disruptions and volatility in energy prices.

• US-China trade war, affecting global trade patterns and forcing businesses to rethink supply chains.

• Tensions in the Middle East, impacting crude oil prices, which directly affect India’s import bill.

Any escalation in these conflicts can increase market volatility, disrupt trade routes, and create economic uncertainty, impacting India’s growth.

3.2 Inflation and Interest Rate Risks

Fluctuations in Fuel and Commodity Prices

India imports over 80% of its crude oil, making it highly vulnerable to fluctuations in global fuel prices. Rising energy costs directly impact:

• Inflation, increasing transportation and production costs.

• Fiscal deficit, as higher oil prices lead to a greater subsidy burden.

• Currency depreciation, as increased dollar outflows weaken the rupee.

Similarly, fluctuations in commodity prices (such as food grains, metals, and industrial inputs) can affect manufacturing costs and consumer purchasing power.

RBI’s Measures to Control Inflation and Currency Stability

To manage inflation and ensure currency stability, the Reserve Bank of India (RBI) takes several measures, including:

• Adjusting repo rates: By increasing interest rates, the RBI can control money supply and reduce inflation, but this may slow down economic growth.

• Intervening in the forex market: The RBI buys or sells foreign exchange to stabilize the rupee.

• Encouraging financial discipline: Fiscal policies are aligned to control inflation without hampering economic growth.

India has successfully kept inflation under 6%, but global uncertainties, high input costs, and supply chain disruptions remain challenges.

3.3 Employment and Skill Development

Job Creation in Manufacturing and Services

India needs to generate millions of jobs annually to absorb its growing workforce. While government initiatives like Make in India and PLI schemes are boosting manufacturing jobs, the informal sector still dominates employment.

• The IT and services sector is creating new jobs, but there is a rising need for upskilling in AI, automation, and data analytics.

• Manufacturing job growth is uneven, with automation reducing the number of low-skilled jobs.

• Startups and the gig economy (Zomato, Swiggy, Uber, etc.) are offering employment, but job security remains a concern.

Need for Skill Development to Match Industrial Growth

Despite economic growth, a skills gap exists between workforce capabilities and industry demands. Challenges include:

• Mismatched education and job requirements, especially in high-tech industries.

• Lack of vocational training programs, limiting employability in manufacturing, AI, and automation.

• Need for reskilling and upskilling initiatives, particularly for those in traditional sectors transitioning to digital and tech-based industries.

To address this, the government has launched initiatives like Skill India, National Apprenticeship Promotion Scheme (NAPS), and digital learning programs to equip workers with industry-relevant skills.

4. Conclusion

India’s economic growth projection of 6.5% for FY26 reflects its strong domestic demand, industrial expansion, digital transformation, and policy-driven economic reforms. However, this trajectory is not without risks, including global economic slowdowns, inflationary pressures, and employment challenges. Balancing these opportunities and challenges will be critical for India to sustain its growth momentum and move toward becoming a $5 trillion economy in the coming years.

Summary of Key Growth Drivers

1. Strong Domestic Demand:

   • Private consumption is a major driver, fueled by rising incomes, urbanization, and an expanding middle class.

   • The rapid growth of e-commerce and digital transactions is reshaping consumer behavior, creating new market opportunities.

2. Manufacturing and Infrastructure Boom:

   • The ‘Make in India’ initiative and Production-Linked Incentive (PLI) schemes are accelerating industrial output, boosting exports, and reducing import dependence.

   • Massive infrastructure projects in railways, roads, ports, and renewable energy are improving connectivity and business efficiency.

3. Digital and Technological Transformation:

   • The fintech revolution (UPI, AI-driven banking, and digital lending) is increasing financial inclusion and economic efficiency.

   • India’s IT sector remains a global powerhouse, driving software exports and technological innovation.

   • 5G rollout will enhance connectivity, automate industries, and expand opportunities in AI and IoT.

4. Rising Foreign Direct Investment (FDI) and Trade Expansion:

   • Increased FDI in key industries like EVs, semiconductors, and pharmaceuticals is positioning India as a global manufacturing hub.

   • Bilateral and multilateral trade agreements (such as the India-EU FTA and CEPA with UAE and Australia) are opening new markets for Indian goods and services.

5. Proactive Policy Reforms and Macroeconomic Stability:

   • GST implementation and tax rationalization have improved revenue collection and eased business operations.

   • Ease of doing business initiatives have made India more attractive to startups and global investors.

   • RBI’s monetary policy and banking sector reforms have ensured financial stability, controlling inflation and supporting economic growth.

Summary of Key Risks and Challenges

1. Global Economic Uncertainty:

   • Slowdowns in major economies like the US, Europe, and China can reduce export demand and investment inflows.

   • Geopolitical tensions, including the Russia-Ukraine conflict and US-China trade war, could disrupt supply chains and impact global trade.

2. Inflation and Currency Volatility:

   • Rising fuel and commodity prices may increase production costs and impact consumer purchasing power.

   • The RBI must carefully balance interest rates to control inflation while maintaining economic growth.

3. Employment and Skill Development Challenges:

   • While growth in manufacturing and services is creating jobs, automation and AI advancements are reshaping labor demand.

   • Skill development remains crucial to match industrial needs and bridge the workforce gap.

Final Thoughts on India’s Economic Potential in FY26

Despite short-term challenges, India remains one of the fastest-growing major economies, backed by strong domestic consumption, industrial expansion, digital transformation, and government-led economic reforms.

• India’s digital economy and IT sector will continue to drive global competitiveness, ensuring sustained economic growth.

• Infrastructure investments will enhance productivity, making India a global manufacturing and logistics hub.

• FDI inflows and trade agreements will open new markets, strengthening India’s position in global trade.

• Proactive government policies and financial sector reforms will ensure stability, allowing India to navigate global uncertainties.

If structural reforms, skill development, and inflation management are effectively addressed, India will not only achieve its 6.5% GDP growth target for FY26 but also move closer to its vision of a $5 trillion economy in the near future.

For more details, you can refer to the official EY report on India’s economic outlook.

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